A first step in this redirection of policy focus on domestic development is for China to free itself from dollar hegemony. This can be done by legally requiring payment of all Chinese exports to be denominated in yuan to stop the unproductive role of exporting for dollars that cannot be spent domestically without incurring heavy monetary penalty. Such a policy affects only Chinese exporters and can be implemented unilaterally by Chinese law as a sovereign nation, without any need for international coordination or foreign or supranational approval. (See Breaking free from dollar hegemony, Asia Times Online, July 30, 2008.)
Cross-border exchange of regional currencies is an important way to circumvent a shortage of dollars and other currencies, as well as reduce exposure to exchange rate volatility. Developing countries in eastern and central Asia as well as South America are beginning to recognize the Chinese yuan as an appropriate currency for bilateral trade settlements. In some case, the yuan is beginning to serve as a reserve currency for bilateral trade.
Central banks in China and South Korea signed a 180 billion yuan (US$26.4 billion) currency swap framework agreement on December 12, 2008. The People's Bank of China entered into a 200 billion yuan swap with the Hong Kong Monetary Authority on January 20, 2009; an 80 billion yuan agreement with Malaysia's central bank on February 8; a 20 billion yuan deal with the National Bank of Belarus on March 11, a 100 billion yuan swap with the central bank of Indonesia on March 24, and an 80 billion yuan swap with the central bank of Argentina. The swaps will allow the parties to avoid using dollars in trade between them and China. Other central banks have also indicated a willingness to enter currency swap agreements with China.
Currency swaps allows a central bank to inject a counter-party's currency into its own financial system, allowing domestic businesses to borrow the other country's currency and use it to pay for imports of that country's goods, thereby easing the pressure on trade caused by an insufficiency of dollar. Technically, currency swap agreements are simply two-way loans between central banks. Foreign central banks generally use borrowed yuan to settle trades with China or as a reserve currency. China, on the other hand, uses foreign currency holdings as collateral. Consequently, regional circulation of the yuan expands with bilateral currency swaps.
The system hinges on confidence in the yuan among all swap parties. As liquidity of the dollar, the generally accepted reserve currency for international settlement, dries up in the current financial crisis, serious problems in credit and exchange rate risks have emerged. As a result, regional demand for trade settlement in local currency has appeared. As the currency of the largest economy engaged in the production of manufactured goods, the yuan naturally fills in as the preferred currency to respond to this demand. The scale of currency swaps is determined by market demand, not by currency hegemony.
http://www.atimes.com/atimes/Global_Economy/KD15Dj04.html
World leaders miss the target
Showing posts with label Lui. Show all posts
Showing posts with label Lui. Show all posts
1 April 2009
The New Deal dollar and the Obama dollar
Obama told the world during his presidential campaign that his presidency will be one of consequence. In his inaugural address, he proclaimed: "There are some who question the scale of our ambitions - who suggest that our system cannot tolerate too many big plans ... What the cynics fail to understand is that the ground has shifted beneath them ... The question we ask today is not whether our government is too big or too small but whether it works."
Rahm Emanuel, Obama's chief of staff, famously said that a crisis is a terrible thing to waste. A corollary is that government intervention is an even more terrible thing to waste, which is something that the Obama team has yet to realize.
Obama has the rare opportunity to reverse the Reagan revolution of smearing government as always being the problem, never the solution. There is now a growing general consensus that the abdication of government responsibility to regulate free-market fundamentalism has been the root cause of the current global economic crisis, and that the free-market solution adopted by Paulson during the George W Bush administration in response to failed markets has been in itself a failure.
Midway through his first 100 days, sensitive to criticism of his "tell it like it is" warnings about the seriousness of the economic crisis, Obama shifted his rhetoric to sound like his campaign opponent, John McCain claiming that the economy is fundamentally sound, a line that sank the Herbert Hoover presidency in the 1932 presidential election.
Very few people beside the diehard cheerleaders of free-market fundamentalism at CNBC, can now honestly conclude from either economic data or personal experience that the economy is fundamentally sound. By yielding to criticism that his rhetoric was talking down the market, Obama is in danger of letting a serious global crisis go to waste. An economy that is fundamentally sound needs no fundamental structural reform, only an emergency treatment before returning to business as usual.
Obama needs to understand that the market is not the economy. The market operating through a price system is only a partial mirror of the economy. The task at hand is to save an economy severely impaired by income stagnation. Restoring with future tax revenue the price bubble of financial markets that had been detached from the real economy is to mask the symptom while ignoring the disease. Such an approach robs the market's ability to self-correct imbalances and distortions caused by a dysfunctional monetary policy and government abdication of responsible regulation.
Larry Summers, Obama's top economic advisor, is known as a strong defender of free markets. In a predictable Faustian declaration, Summers explains: "The view that the market economy is inherently self-stabilizing, always, has been dealt a fatal blow ... This notion that the economy is self-stabilizing is usually right, but it is wrong a few times a century and this is one of those times."
The central ideological consequence of this fatal market failure, Summers says, is that there "is a need for extraordinary public action at those times ... The debate over whether you can love your country and hate your government has been settled with a negative answer." Love of country is now congruent with love of government, albeit smart government, which to Reaganites is an oxymoron.
Obama's new progressivism
Obama's new progressivism is based on the rehabilitation of government intervention in a failed market economy, even as his top economist only accepts the progressive battle cry as a temporary necessity. Even Obama himself has to clarify publicly that he realizes that Americans do not envy or resent the rich because even the American dream allows the poor to emulate the rich. But he stops short of proposing an income policy even when it is obvious that income disparity creates destabilizing imbalance between supply and demand. The failure of government intervention from misuse, such as intervention to help wayward financial institutions rather than victimized individuals, can turn the US into a failed state and the economy into a failed market.
Rather than a national income policy to raise income for all, Obama chooses an income redistribution path through raising taxes on the rich and cutting taxes on the poor and the middle class, whose members are really the working poor because of a decade of wage stagnation.
An income policy will relieve the working poor by guaranteeing every worker a good living wage to be an effective consumer without unsustainable debt. After all, it is a very American idea, which was first put into practice successfully by Henry Ford. Thus far, the reality is that the American dream has turned into a nightmare in which the poor emulate the rich by spending beyond their meager means and taking on unsustainable debt, not by spending rising income. Effective income parity does not aim at lowering the income of the rich, it aims at raising the income of the poor.
While Summers is continuing Paulson's aim of saving free-market capitalism with temporary transitional state capitalism, Obama's rhetoric until recently had been couched in a far-reaching progressive agenda of reversing widening income disparity and unsustainable wage/price imbalances that have left the world with overcapacity caused by insufficient demand, which had to be masked by excessive debt.
But Obama's March 12 speech before the Conference Board, a group representing the interests of big business, was disappointing in that it made our progressive reformer sound like just another garden variety "trickle down" market fundamentalist. Obama's strategy of first putting out the raging financial fires before dealing with long-term structural reform is fundamentally flawed because the arsonist responsible for the raging fires is a decades-long denial of the urgent need for fundamental structural reform. There is an overwhelming prospect that if and when the raging fire is contained, fundamental reform will give way to business-as-usual with a celebration of the resilience of market fundamentalism. The prospect of recurring crises every decade will continue.
Obama's initiatives blocked by centrists
Obama's three core progressive initiatives - universal education, universal health care and energy/environment transformation - if implemented without watered-down compromise, will be steps to restore US society to its true core values, not just a new, improve American dream that bears little resemblance to harsh reality.
Unfortunately, the Obama team is dominated by centrists who have now taken on the battle standard of the failed alliance of neo-liberals in global economics and neo-conservatives in global security. These centrists view their leader's grand progressive agenda as merely a convenient temporary antidote of emergency intensive care for a dysfunctional and unjust economic system and a militant hegemonic foreign policy.
According to Summers: "It is periodically the task of progressives to, ironically, save the market system from its own excesses." Centrists are reformers who believe that slavery can be eliminated simply by paying below-living wages.
The call by Summers, in his new post as chairman of the White House National Economic Council, for international coordination of stimulus programs is being rejected by his counterparts in the European Union. Disagreements between the EU and the US over how to deal with the global recession is widening as EU governments show little appetite for the US formula of piling up more public debt to fight the collapse in output and jobs caused by excess private debt. European social democrats are not on the same wavelength with the pro-big-business, pro-market approach of Paulson/Summers/Geithner, as three market fundamentalist musketeers, supported by Fed chairman Ben Bernanke as the ever loyal D'Artignan.
To the Europeans, shifting private debt to public debt is not only self deception, especially under a destructive regime of dollar hegemony, it is also particularly dangerous if all sovereign debts are denominated in dollars that EU central banks cannot print but have to earn through foreign trade.
Government stimulus packages are funded with future tax revenue. It is natural that tax money is viewed by the paying public as funds that should be spent within each country. Government bailout money to transnational financial institutions is likely to be used globally. Every government is now engaged in a race to maximize national multiplier effects of its stimulus programs. Thus while all governments are paying lip service to resist protectionism against movement of goods, few have faced up to the new form of financial protectionism practiced by transnational institutions.
The transfer of funds from London to New York by Lehman Brothers during the early hours of its bankruptcy filing is an example of the problem of financial nationalism. Scores of hedge funds that had hundreds of millions of dollars in cash and other securities parked with Lehman's prime brokerage operation in London have had their accounts frozen and the funds transferred to New York, leaving the United Kingdom with less money to settle the bankrupt firm's liabilities.
Lots more
Rahm Emanuel, Obama's chief of staff, famously said that a crisis is a terrible thing to waste. A corollary is that government intervention is an even more terrible thing to waste, which is something that the Obama team has yet to realize.
Obama has the rare opportunity to reverse the Reagan revolution of smearing government as always being the problem, never the solution. There is now a growing general consensus that the abdication of government responsibility to regulate free-market fundamentalism has been the root cause of the current global economic crisis, and that the free-market solution adopted by Paulson during the George W Bush administration in response to failed markets has been in itself a failure.
Midway through his first 100 days, sensitive to criticism of his "tell it like it is" warnings about the seriousness of the economic crisis, Obama shifted his rhetoric to sound like his campaign opponent, John McCain claiming that the economy is fundamentally sound, a line that sank the Herbert Hoover presidency in the 1932 presidential election.
Very few people beside the diehard cheerleaders of free-market fundamentalism at CNBC, can now honestly conclude from either economic data or personal experience that the economy is fundamentally sound. By yielding to criticism that his rhetoric was talking down the market, Obama is in danger of letting a serious global crisis go to waste. An economy that is fundamentally sound needs no fundamental structural reform, only an emergency treatment before returning to business as usual.
Obama needs to understand that the market is not the economy. The market operating through a price system is only a partial mirror of the economy. The task at hand is to save an economy severely impaired by income stagnation. Restoring with future tax revenue the price bubble of financial markets that had been detached from the real economy is to mask the symptom while ignoring the disease. Such an approach robs the market's ability to self-correct imbalances and distortions caused by a dysfunctional monetary policy and government abdication of responsible regulation.
Larry Summers, Obama's top economic advisor, is known as a strong defender of free markets. In a predictable Faustian declaration, Summers explains: "The view that the market economy is inherently self-stabilizing, always, has been dealt a fatal blow ... This notion that the economy is self-stabilizing is usually right, but it is wrong a few times a century and this is one of those times."
The central ideological consequence of this fatal market failure, Summers says, is that there "is a need for extraordinary public action at those times ... The debate over whether you can love your country and hate your government has been settled with a negative answer." Love of country is now congruent with love of government, albeit smart government, which to Reaganites is an oxymoron.
Obama's new progressivism
Obama's new progressivism is based on the rehabilitation of government intervention in a failed market economy, even as his top economist only accepts the progressive battle cry as a temporary necessity. Even Obama himself has to clarify publicly that he realizes that Americans do not envy or resent the rich because even the American dream allows the poor to emulate the rich. But he stops short of proposing an income policy even when it is obvious that income disparity creates destabilizing imbalance between supply and demand. The failure of government intervention from misuse, such as intervention to help wayward financial institutions rather than victimized individuals, can turn the US into a failed state and the economy into a failed market.
Rather than a national income policy to raise income for all, Obama chooses an income redistribution path through raising taxes on the rich and cutting taxes on the poor and the middle class, whose members are really the working poor because of a decade of wage stagnation.
An income policy will relieve the working poor by guaranteeing every worker a good living wage to be an effective consumer without unsustainable debt. After all, it is a very American idea, which was first put into practice successfully by Henry Ford. Thus far, the reality is that the American dream has turned into a nightmare in which the poor emulate the rich by spending beyond their meager means and taking on unsustainable debt, not by spending rising income. Effective income parity does not aim at lowering the income of the rich, it aims at raising the income of the poor.
While Summers is continuing Paulson's aim of saving free-market capitalism with temporary transitional state capitalism, Obama's rhetoric until recently had been couched in a far-reaching progressive agenda of reversing widening income disparity and unsustainable wage/price imbalances that have left the world with overcapacity caused by insufficient demand, which had to be masked by excessive debt.
But Obama's March 12 speech before the Conference Board, a group representing the interests of big business, was disappointing in that it made our progressive reformer sound like just another garden variety "trickle down" market fundamentalist. Obama's strategy of first putting out the raging financial fires before dealing with long-term structural reform is fundamentally flawed because the arsonist responsible for the raging fires is a decades-long denial of the urgent need for fundamental structural reform. There is an overwhelming prospect that if and when the raging fire is contained, fundamental reform will give way to business-as-usual with a celebration of the resilience of market fundamentalism. The prospect of recurring crises every decade will continue.
Obama's initiatives blocked by centrists
Obama's three core progressive initiatives - universal education, universal health care and energy/environment transformation - if implemented without watered-down compromise, will be steps to restore US society to its true core values, not just a new, improve American dream that bears little resemblance to harsh reality.
Unfortunately, the Obama team is dominated by centrists who have now taken on the battle standard of the failed alliance of neo-liberals in global economics and neo-conservatives in global security. These centrists view their leader's grand progressive agenda as merely a convenient temporary antidote of emergency intensive care for a dysfunctional and unjust economic system and a militant hegemonic foreign policy.
According to Summers: "It is periodically the task of progressives to, ironically, save the market system from its own excesses." Centrists are reformers who believe that slavery can be eliminated simply by paying below-living wages.
The call by Summers, in his new post as chairman of the White House National Economic Council, for international coordination of stimulus programs is being rejected by his counterparts in the European Union. Disagreements between the EU and the US over how to deal with the global recession is widening as EU governments show little appetite for the US formula of piling up more public debt to fight the collapse in output and jobs caused by excess private debt. European social democrats are not on the same wavelength with the pro-big-business, pro-market approach of Paulson/Summers/Geithner, as three market fundamentalist musketeers, supported by Fed chairman Ben Bernanke as the ever loyal D'Artignan.
To the Europeans, shifting private debt to public debt is not only self deception, especially under a destructive regime of dollar hegemony, it is also particularly dangerous if all sovereign debts are denominated in dollars that EU central banks cannot print but have to earn through foreign trade.
Government stimulus packages are funded with future tax revenue. It is natural that tax money is viewed by the paying public as funds that should be spent within each country. Government bailout money to transnational financial institutions is likely to be used globally. Every government is now engaged in a race to maximize national multiplier effects of its stimulus programs. Thus while all governments are paying lip service to resist protectionism against movement of goods, few have faced up to the new form of financial protectionism practiced by transnational institutions.
The transfer of funds from London to New York by Lehman Brothers during the early hours of its bankruptcy filing is an example of the problem of financial nationalism. Scores of hedge funds that had hundreds of millions of dollars in cash and other securities parked with Lehman's prime brokerage operation in London have had their accounts frozen and the funds transferred to New York, leaving the United Kingdom with less money to settle the bankrupt firm's liabilities.
Lots more
24 December 2008
China's inflation-free route from crisis
The structural problem of the Chinese economy can be described in one sentence: China produces from plants financed by foreign investment that operate with low domestic wages for foreign markets that pay with dollars that cannot be used in the domestic economy.
The solution to this structural problem can also be summed up in one sentence: China must finance plants with sovereign credit to produce for the domestic market where consumer purchasing power will come from high wages, with sovereign credit repaid
from increased tax revenue from a vibrant domestic economy.
The adverse impact from the current global financial crisis on the Chinese economy originates from the export sector financed by foreign capital. Foreign markets have abruptly contracted since mid-2007 to cause massive closure of tens of thousands of foreign joint-ventures or wholly owned enterprises, big, medium and small, in the Chinese export sector located along the coastal regions.
Many of these enterprises normally repatriate their profit continually, leaving little or no reserve funds to keep operating in slow periods. At the first sign of financial distress, the absentee owners of these enterprises find it expedient to simply shut down operations and vanish from the local scene, leaving millions of Chinese migrant workers suddenly unemployed with no severance pay or unemployment insurance payments, not even the train fare to return home. The foreign investors just abandon their money-losing factories, in which they hold little equity, for foreclosure by lending institutions.
These bankrupt export enterprises are not likely to reopen as few expect the global financial crisis to recover soon.
Five years ago, in 2003, Premier Wen Jiabao drew national attention by personally demanding back wages owed to a migrant worker by his abusive employer to be paid. In February 2008, the National People's Congress (NPC) accredited the qualification of three rural migrant workers as newly-elected deputies, making them the first group of "spokespersons" for migrant laborers all over the country in the national legislature. This development is a historic breakthrough that will help normalize the gap between urban and rural development and the oppression of migrant workers by unsavory employers, domestic and foreign.
The Central Committee of the Communist Party of China (CPC) issued a landmark policy document on rural reform and development in October 2008, vowing to enhance safeguards of the rights of migrant workers, ensuring them equal wages and benefits, including their children's education, public health and affordable housing as those received by resident citizens.
Since China adopted the reforms and opening-up policy in 1978, the number of migrant workers to the coastal export regions has grown to over 200 million. China has been improving rules and laws to cope with the new changes and to ensure migrant workers' rights. The unjust condition of migrant workers has become a microcosm of worker conditions in the socialist market economy in general. We need to remember that the driving force of the socialist revolution that began in China in 1921 was to eliminate such unjust conditions for workers.
The Dongguan City Association of Enterprises with Foreign Investment estimates that 9,000 of the 45,000 factories in the cities of Guangzhou, Dongguan and Shenzhen - the heart of China's industrial south - are expected to close before the Lunar New Year celebrated in China in late January. That could mean up to 2.7 million workers facing unemployment immediately, the association said. If the trend continues, unemployment can be expected to double every quarter.
The current global financial crisis has accelerated a process already underway to upgrade China's economy from low-tech, labor intensive factory jobs to high-tech manufacture of higher value-added products and high-skill jobs in the service industry sector. The plan to correct the imbalance of development between the coastal regions and the interior regions is tied to China's effort to shift its economy from excessive export dependency toward domestic consumption and development. Yet the pace of restructuring must be further accelerated with the aim of a full-employment economy based on balanced domestic development and consumption within a period of five years.
For China, the only viable strategy is to shift these bankrupt export factories in the coastal regions toward the domestic market. But the domestic market at present is too weak in consumer demand due to low wages to absorb the overcapacity in export. Thus no funds are available in private credit and capital markets to finance urgently needed restructuring of the export sector on a national scale. Market forces are simply not up to the task.
To kick-start a new economic strategy of shifting the Chinese economy from export dependency to domestic construction, the Chinese government needs to establish a Commission to Restructure the Chinese Economy (CRCE) as a special agency in the State Council under the direct control of the office of the premier, with emergency powers to deal with the unemployment fallout from the sudden collapse of the export sector that will soon threaten social stability.
The proposed CRCE should have full authority to formulate and implement a national economic recovery program with appropriate and adequate credit-creation power to finance an urgently needed recovery to provide full employment at high wages. Equally importantly, the CRCE must have full government authority to commit unconditionally to the timely repayment and retirement of this temporary debt created by sovereign credit.
Economic recovery through shifting from export dependency to domestic development requires coordinated actions by both the state and the private sectors. The government's role is to guide private sector incentives toward a national full-employment plan through tax incentives and regulatory regimes. Government fiscal spending should be limited to funding infrastructure, both physical and social, that cannot be efficiently financed by private or even collective capital. Consumer demand should be enhanced as a priority in a national income policy to quickly raise wage levels in parallel with a well-funded social security program, to eliminate the need for over-saving out of concern for emergency health expenses and provision for old-age security.
The CRCE would be responsible for launching immediately a massive work-creation program to achieve in-place national full employment with minimal relocation of population. This program can be financed outside of the government's fiscal budget by a pre-financing regime through the use of work-creation certificates, a form of special-purpose money specially designed to facilitate job-creation in the socialist market economy.
Under the pre-financing regime, the State Council will authorize the CRCE, with full support of the Finance Ministry, to issue work-creation certificates that mature every three months and are renewable up to five years. These certificates would be distributed by the CRCE to local public works agencies and participating financial institutions that lend to private enterprises engaged in the job-creation in the program to shift export enterprises toward the domestic market.
Firms that need cash to participate in job-creation projects ordered by local public works agencies and private enterprises approved by the CRCE can draw on work-creation certificates against the accounts of local public works agency or industrial customers of the participating financial institutions.
The financial institutions accepting the work-creation certificates can treat such certificates as commercial paper that can be discounted at commercial banks, which in turn can discount them at the People's Bank of China, the central bank. The process would provide the needed liquidity to facilitate the payment of wages outside the range of the government's fiscal budget.
The CRCE would undertake to redeem one fifth of all work-creation certificates issued through the central bank as the economy and tax revenue recover and expand. As collateral for the certificates, the Finance Ministry would deposit in the central bank a corresponding amount of tax vouchers good for paying taxes. As the Ministry of Finance redeems work-creation certificates, the tax vouchers would be returned to the Finance Ministry.
It is important that the government must stand firmly behind the commitment to redeem the work-creation certificates in order to protect their financial integrity. New series of five-year work-creation certificates can be issued as needs.
Credit creation outside of the government's fiscal budget for the purpose of job creation poses no threat of inflation. It is a more responsible alternative to tax increases to support a balanced budget. The fiscal cost of redeeming work-creation certificates will be offset by the corresponding decrease in welfare subsidy costs due to unemployment. As fiscal surplus accumulates from full employment at rising wages, the surplus can be used to reduce taxes and increase fiscal spending on upgrading physical and social infrastructure. This approach is the shortest route to full employment at rising wages while shifting the economy from export dependency toward domestic development.
Since the export market is and will always be small compared to the full potential of the Chinese domestic market, profitability of productive enterprises can be sustained through an economy of scale to reduce unit cost. Such unit cost reduction can be achieved by rising productivity made possible by expanding sales volume in the domestic market. Exports then will only have to pay for the cost of needed imports to maintain a balanced trade.
As industrial enterprises tap the growing domestic market, aggregate sales revenue will support wage rises as the portion of profit previously reserved by middleman foreign distributors and importers can now be use to support higher wages which in turn will strengthen domestic consumer demand. Some upward movement of prices should be allowed to adjust the price gap between agricultural produce and manufactured products to raise farm income.
A government price policy should be instituted to prevent destructive cut-throat price competition and below-cost dumping in both profitable and unprofitable markets. Excess profit should be taxed to prevent over-investment in profitable sectors. Of special importance is to narrow the gap of wholesale and retail prices for farm produce to increase the net income of farmers while holding down consumer prices.
To keep the 10 million migrant workers currently being laid off by the export sector employed at an annual wage level of the equivalent of US$10,000 (68,490 yuan), a work-creation certificate program of $100 billion is needed. To keep the 10 million college graduates from unemployment, another work-creation certificate program will be needed worth $100 billion. This is well within the financial capability of the Chinese economy as it amounts to only 20% of the over US$2 trillion in foreign exchange currently held by China. It is important to understand that this amount is not fiscal spending, but sovereign credit that will be repaid as the economy develops.
China does not have to accept the fate of financial crises made in the US, if Chinese policymakers have the courage to think independently. To eliminate poverty, China must first eliminate a poverty of creative ideas among its policymaking circles overwhelmed by wholesale acceptance of voodoo neo-liberal market fundamentalism propaganda.
Henry C K Liu is chairman of a New York-based private investment group. His website is at http://www.henryckliu.com
The solution to this structural problem can also be summed up in one sentence: China must finance plants with sovereign credit to produce for the domestic market where consumer purchasing power will come from high wages, with sovereign credit repaid
from increased tax revenue from a vibrant domestic economy.
The adverse impact from the current global financial crisis on the Chinese economy originates from the export sector financed by foreign capital. Foreign markets have abruptly contracted since mid-2007 to cause massive closure of tens of thousands of foreign joint-ventures or wholly owned enterprises, big, medium and small, in the Chinese export sector located along the coastal regions.
Many of these enterprises normally repatriate their profit continually, leaving little or no reserve funds to keep operating in slow periods. At the first sign of financial distress, the absentee owners of these enterprises find it expedient to simply shut down operations and vanish from the local scene, leaving millions of Chinese migrant workers suddenly unemployed with no severance pay or unemployment insurance payments, not even the train fare to return home. The foreign investors just abandon their money-losing factories, in which they hold little equity, for foreclosure by lending institutions.
These bankrupt export enterprises are not likely to reopen as few expect the global financial crisis to recover soon.
Five years ago, in 2003, Premier Wen Jiabao drew national attention by personally demanding back wages owed to a migrant worker by his abusive employer to be paid. In February 2008, the National People's Congress (NPC) accredited the qualification of three rural migrant workers as newly-elected deputies, making them the first group of "spokespersons" for migrant laborers all over the country in the national legislature. This development is a historic breakthrough that will help normalize the gap between urban and rural development and the oppression of migrant workers by unsavory employers, domestic and foreign.
The Central Committee of the Communist Party of China (CPC) issued a landmark policy document on rural reform and development in October 2008, vowing to enhance safeguards of the rights of migrant workers, ensuring them equal wages and benefits, including their children's education, public health and affordable housing as those received by resident citizens.
Since China adopted the reforms and opening-up policy in 1978, the number of migrant workers to the coastal export regions has grown to over 200 million. China has been improving rules and laws to cope with the new changes and to ensure migrant workers' rights. The unjust condition of migrant workers has become a microcosm of worker conditions in the socialist market economy in general. We need to remember that the driving force of the socialist revolution that began in China in 1921 was to eliminate such unjust conditions for workers.
The Dongguan City Association of Enterprises with Foreign Investment estimates that 9,000 of the 45,000 factories in the cities of Guangzhou, Dongguan and Shenzhen - the heart of China's industrial south - are expected to close before the Lunar New Year celebrated in China in late January. That could mean up to 2.7 million workers facing unemployment immediately, the association said. If the trend continues, unemployment can be expected to double every quarter.
The current global financial crisis has accelerated a process already underway to upgrade China's economy from low-tech, labor intensive factory jobs to high-tech manufacture of higher value-added products and high-skill jobs in the service industry sector. The plan to correct the imbalance of development between the coastal regions and the interior regions is tied to China's effort to shift its economy from excessive export dependency toward domestic consumption and development. Yet the pace of restructuring must be further accelerated with the aim of a full-employment economy based on balanced domestic development and consumption within a period of five years.
For China, the only viable strategy is to shift these bankrupt export factories in the coastal regions toward the domestic market. But the domestic market at present is too weak in consumer demand due to low wages to absorb the overcapacity in export. Thus no funds are available in private credit and capital markets to finance urgently needed restructuring of the export sector on a national scale. Market forces are simply not up to the task.
To kick-start a new economic strategy of shifting the Chinese economy from export dependency to domestic construction, the Chinese government needs to establish a Commission to Restructure the Chinese Economy (CRCE) as a special agency in the State Council under the direct control of the office of the premier, with emergency powers to deal with the unemployment fallout from the sudden collapse of the export sector that will soon threaten social stability.
The proposed CRCE should have full authority to formulate and implement a national economic recovery program with appropriate and adequate credit-creation power to finance an urgently needed recovery to provide full employment at high wages. Equally importantly, the CRCE must have full government authority to commit unconditionally to the timely repayment and retirement of this temporary debt created by sovereign credit.
Economic recovery through shifting from export dependency to domestic development requires coordinated actions by both the state and the private sectors. The government's role is to guide private sector incentives toward a national full-employment plan through tax incentives and regulatory regimes. Government fiscal spending should be limited to funding infrastructure, both physical and social, that cannot be efficiently financed by private or even collective capital. Consumer demand should be enhanced as a priority in a national income policy to quickly raise wage levels in parallel with a well-funded social security program, to eliminate the need for over-saving out of concern for emergency health expenses and provision for old-age security.
The CRCE would be responsible for launching immediately a massive work-creation program to achieve in-place national full employment with minimal relocation of population. This program can be financed outside of the government's fiscal budget by a pre-financing regime through the use of work-creation certificates, a form of special-purpose money specially designed to facilitate job-creation in the socialist market economy.
Under the pre-financing regime, the State Council will authorize the CRCE, with full support of the Finance Ministry, to issue work-creation certificates that mature every three months and are renewable up to five years. These certificates would be distributed by the CRCE to local public works agencies and participating financial institutions that lend to private enterprises engaged in the job-creation in the program to shift export enterprises toward the domestic market.
Firms that need cash to participate in job-creation projects ordered by local public works agencies and private enterprises approved by the CRCE can draw on work-creation certificates against the accounts of local public works agency or industrial customers of the participating financial institutions.
The financial institutions accepting the work-creation certificates can treat such certificates as commercial paper that can be discounted at commercial banks, which in turn can discount them at the People's Bank of China, the central bank. The process would provide the needed liquidity to facilitate the payment of wages outside the range of the government's fiscal budget.
The CRCE would undertake to redeem one fifth of all work-creation certificates issued through the central bank as the economy and tax revenue recover and expand. As collateral for the certificates, the Finance Ministry would deposit in the central bank a corresponding amount of tax vouchers good for paying taxes. As the Ministry of Finance redeems work-creation certificates, the tax vouchers would be returned to the Finance Ministry.
It is important that the government must stand firmly behind the commitment to redeem the work-creation certificates in order to protect their financial integrity. New series of five-year work-creation certificates can be issued as needs.
Credit creation outside of the government's fiscal budget for the purpose of job creation poses no threat of inflation. It is a more responsible alternative to tax increases to support a balanced budget. The fiscal cost of redeeming work-creation certificates will be offset by the corresponding decrease in welfare subsidy costs due to unemployment. As fiscal surplus accumulates from full employment at rising wages, the surplus can be used to reduce taxes and increase fiscal spending on upgrading physical and social infrastructure. This approach is the shortest route to full employment at rising wages while shifting the economy from export dependency toward domestic development.
Since the export market is and will always be small compared to the full potential of the Chinese domestic market, profitability of productive enterprises can be sustained through an economy of scale to reduce unit cost. Such unit cost reduction can be achieved by rising productivity made possible by expanding sales volume in the domestic market. Exports then will only have to pay for the cost of needed imports to maintain a balanced trade.
As industrial enterprises tap the growing domestic market, aggregate sales revenue will support wage rises as the portion of profit previously reserved by middleman foreign distributors and importers can now be use to support higher wages which in turn will strengthen domestic consumer demand. Some upward movement of prices should be allowed to adjust the price gap between agricultural produce and manufactured products to raise farm income.
A government price policy should be instituted to prevent destructive cut-throat price competition and below-cost dumping in both profitable and unprofitable markets. Excess profit should be taxed to prevent over-investment in profitable sectors. Of special importance is to narrow the gap of wholesale and retail prices for farm produce to increase the net income of farmers while holding down consumer prices.
To keep the 10 million migrant workers currently being laid off by the export sector employed at an annual wage level of the equivalent of US$10,000 (68,490 yuan), a work-creation certificate program of $100 billion is needed. To keep the 10 million college graduates from unemployment, another work-creation certificate program will be needed worth $100 billion. This is well within the financial capability of the Chinese economy as it amounts to only 20% of the over US$2 trillion in foreign exchange currently held by China. It is important to understand that this amount is not fiscal spending, but sovereign credit that will be repaid as the economy develops.
China does not have to accept the fate of financial crises made in the US, if Chinese policymakers have the courage to think independently. To eliminate poverty, China must first eliminate a poverty of creative ideas among its policymaking circles overwhelmed by wholesale acceptance of voodoo neo-liberal market fundamentalism propaganda.
Henry C K Liu is chairman of a New York-based private investment group. His website is at http://www.henryckliu.com
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